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U.S. Sen. Amy Klobuchar (D-MN), Senator Russ Feingold (D-WI), Senator Jim Webb (D-VA) and Senator Mark Begich (D-AK) have introduced a bill setting limits on wireless service contract early termination fees.

 

One suspects the bill will not go anywhere (there are lots of reasons to introduce legislation, from pleasing a particular constituency to high noble purposes, but few introduced bills go anywhere). Still, one wonders just how much more government involvement in detailed business practices --such as setting prices -- really is needed in this case.

 

For starters, mobile service contracts are voluntary, and they are contracts (contract law used to be a sort-of-important thing, but after all the big bailouts of late, some of which abrogated lawful contracts, one wonders). Klobuchar said the bill is a response to the Verizon (News - Alert) Wireless’ decision to double its early termination fees from $175 to $350 for certain subscribers who end their contracts early.

 

The bill would set limits on ETFs. That sounds reasonable enough. It would also require wireless providers to pro-rate ETFs and clearly notify customers about the fee, not only at the time of purchase, but for the duration of their contracts. That also sounds reasonable enough.

 

Here's the problem: Wireless service providers offer users heavily discounted handsets in exchange for the contract terms. If your last phone cost $200 and the actual retail price of an “unlocked” version was $550, you got a subsidy of $350. Obviously that cost has to be recouped over time.

 

If that device was purchased as part of a family plan, it is conceivable that the incremental monthly cost of the service was as little as $40, before taxes and other fees. It can take quite a while to reach breakeven on such amounts. If operating margin is 40 percent, the service provider has about $16 a month left after paying all the direct expenses of running the business. Out of that $16 must come debt service, dividend payments and taxes, for example.

 

You get the point: It can take a while to recoup the cost of the subsidy.

 

Verizon Wireless points out that consumers don’t have to subject themselves to these fees.

 

Instead, they can choose to not sign a contract and pay full retail price for the phone itself, which of course is usually significantly higher than the cost of the subsidized phone and the early termination fee combined. Customers also can choose to sign a one-year contract and pay a price somewhere between the two-year-contract price and the full retail price.

 

“Forcing consumers to pay outrageous fees bearing little to no relation to the cost of their handset devices is anti-consumer and anti-competitive,” said Klobuchar.

 

I suspect Sen. Klobuchar simply is mistaken about the direct relationship between the size of the subsidy and the cost of the ETF. Most ETFs seem to bear a reasonable relationship to the size of the smartphone subsidy, though one might question the relationship for older feature phones.

 

Whether contracts purchased in exchange for subsidies are “anti-consumer” is questionable. Most consumers like getting their smartphones at subsidized prices. The point is that every consumer has the option to pay full retail whenever they decide to buy a new device. Not many do that.

 

“Consumers should not be punished with exorbitant cancellation fees if they want to change cell phone service providers,” Feingold said.

 

I'm fairly certain most people would agree with that statement. But consumers voluntarily bought their service contracts in exchange for something of tangible value: a heavy phone subsidy. There is no cancellation fee if there is no subsidy.

 

“In these tough economic times, the last thing consumers need is to see rates doubled for no apparent reason,” Begich said. Apparently, the cost of subsidizing the increasingly-popular number of $550 phones is not “apparent.”

 

Still, the bill has, in principle, some redeeming value, even though it seems to me unnecessary. It would prevent wireless carriers from charging an ETF that is higher than the discount on the cell phone that the wireless company offers consumers for entering into a multi-year contract. For example, if a wireless consumer enters into a two-year contract and receives a $150 discount with the contract, the ETF cannot exceed $150.

 

The bill also would require wireless carriers to pro-rate their ETFs for consumers who leave their contracts early so that the ETF for a two-year contract would be reduced by half after one year and pro-rated down to zero by the end of a contract term. That already is industry practice.

 

The bill also would require monthly billing statements to clearly state the pro-rated fee customers would be charged if they terminate their contracts before the end of the next billing cycle.

 

Few people probably like contracts or ETFs. But most people dislike paying the full retail price of a new smartphone, either. The next time you are getting ready, seriously ready, to buy a new smartphone, compare the unlocked price and the subsidized price. There is a painful gap that encourages you to choose the contract and the subsidized price.

 

You don't have to go with the contract. You don't have to buy the latest version of the smartphone you want. You don't have to buy a smartphone. But most consumers seem to make rational choices about these things.